287.23
wk-range: 170.01 … 334.55 YTD Return: 16.7% IPO Date: November 1994 Mkt Cap: 29.34 M Shrs Ostd: 117.2 M
Company Background: Albemarle Corporation is a global specialty chemicals company that develops and manufactures a range of advanced and proprietary products. The company operates in three different segments: Lithium, Bromine, and Catalysts. The Lithium segment is the leading producer of lithium and lithium compounds. These compounds are used for the manufacturing of lithium batteries used in consumer electronics and electric vehicles. The Bromine segment includes products primarily in fire safety solutions. The Catalyst segment includes the development of hydro processing catalysts (HPC) which is used to upgrade oil fractions to clean fuels and other usable oil feedstocks. This segment also includes the development of fluidized catalytic cracking (FCC) catalyst which is used in the refining of crude oil to produce gasoline, diesel and other products.
Thesis 1: A Probable rise in lithium prices combined with new outlook on the structure of their contracts is likely to increase revenue. There is a debate whether lithium prices are going to rise or fall. Demand for lithium is forecasted to grow by 25-30% CAGR from 2023-2027 and supply is unable to keep up considering the following factors: (1) it takes 10 years on average to open a new lithium mine (2) it takes 14 years on average to start operations for integrated projects (operations for turning the lithium mined to value-added products like lithium battery materials (3) most of the high quality lithium has already been mined and therefore it is going to take many small projects to increase supply. Albemarle is also changing its pricing strategies in 2023. Due to forecasts of higher lithium prices in 2023, Albemarle is abolishing its fixed price contracts and changing it solely to variable and spot priced contracts.
Thesis 2: An overlooked clause in the Inflation Reduction Act states that all minerals sourced from the United States and any country that it has free trade agreements with, will receive tax credits. According to most analyst reports, the street has paid more attention to the tax credits imposed on electric vehicle and battery manufacturers that the minerals section of the Inflation Reduction Act is overlooked. Albemarle has its lithium mining operations in the United States and in Chile which has a free trade agreement with the U.S. Furthermore, Albemarle Sales estimates are at 82% CAGR for the next 2 years, however, it is overlooking the fact that not only will orders increase from existing customers, but there is also a high probability that companies that source their lithium from may also switch to Albemarle for their lithium demands. I forecast that Albemarle will experience a higher CAGR growth compared to analysts’ estimates.
Thesis 3: Albemarle’s catalyst segment is poised for growth due to a shift in demand for oil to the U.S. and Middle East. The recent decision by major powers to impose a $60-per-barrel price cap on Russian crude oil has resulted in a ban on supply to nations that comply with the cap, leading to a shift in oil purchases to the U.S. and Middle East. Albemarle's largest catalyst customers, including Chevron, ExxonMobil, Saudi Aramco, and the Kuwait National Petroleum Company, are based in these regions and are expected to increase production, driving up demand for Albemarle's catalysts and services.
Valuation: Using an average price to earnings ratio of 17x derived from the comparable company analysis and analysts’ forward-looking earnings per share of $28.48, I forecast that Albemarle’s Implied share price is $484.16 with an implied upside of 68.6% upside in stock price appreciation.
Risks: The lithium industry as a whole uses up a lot of raw materials such as freshwater. These ESG concerns may lead to further regulations which would limit Albemarle’s productive capacity and therefore may decrease their potential revenue. However, due to the fact that current trends are headed toward cleaner energy initiatives (e.g. The Inflation Reduction Act in the U.S. and Chile setting goals of converting 70% of its total energy consumption to renewables by 2030 and becoming carbon neutral by 2050), further regulations for Albemarle may be unlikely.
